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Proposed regulations: Qualified opportunity zone funds under section 1400Z-2

Qualified opportunity zone funds under section 1400Z-2

The U.S. Treasury Department and IRS today released a version of proposed regulations (REG-120186-18) and a notice of withdrawal of earlier proposed regulations as guidance and to provide additional details about investment in qualified opportunity funds under section 1400Z-2.*


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*Section 1400Z-2 was added to the Code by the U.S. tax law enacted in December 2017 (Pub. L. No. 115-97, that is also known as the “Tax Cuts and Jobs Act” (TCJA)).

Read text of the proposed regulations [PDF 962 KB] (169 pages) as released today by the IRS and Treasury. This version of the proposed regulations includes the following statement:

This document will be submitted to the Office of the Federal Register (OFR) for publication. The version … released today may vary slightly from the published document if minor editorial changes are made during the OFR review process. The document published in the Federal Register will be the official document. 


The IRS also released a version of a notice and request for information [PDF 145 KB] seeking public input on the development of public information collection and tracking related to investment in qualified opportunity funds. This notice will also be delivered for publication in the Federal Register.

The purpose of this report is to provide text (and also the related IRS release) of the proposed regulations. KPMG will provide a report of initial impressions about these proposed regulations.

Overview of proposed regulations, as provided by IRS

According to a related IRS release—IR-2019-75:

  • The proposed regulations allow the deferral of all or part of a gain that is invested into a qualified opportunity fund that would otherwise be includible in income. The gain is deferred until the earlier of: (1) the date when the investment is sold or exchanged; or (2) December 31, 2026.
  • If the investment is held for at least 10 years, investors may be able to permanently exclude gain from the sale or exchange of an investment in a qualified opportunity fund.
  • Qualified opportunity zone business property is tangible property used in a trade or business of the qualified opportunity fund if the property was purchased after December 31, 2017.
  • The proposed regulations permit tangible property acquired after December 31, 2017, under a market rate lease, to qualify as “qualified opportunity zone business property” if during substantially all of the holding period of the property, substantially all of the use of the property was in a qualified opportunity zone. 

The IRS release continues to explain that a “key part of the newly released guidance” clarifies the ”substantially all” requirements for the holding period and use of the tangible business property:

  • For use of the property, at least 70% of the property must be used in a qualified opportunity zone.
  • For the holding period of the property, tangible property must be qualified opportunity zone business property for at least 90% of the qualified opportunity fund’s or qualified opportunity zone business’s holding period.
  • The partnership or corporation must be a qualified opportunity zone business for at least 90% of the qualified opportunity fund’s holding period.

According to the IRS, there are situations when deferred gains may become taxable if investors transfer their interest in a qualified opportunity fund. For example, if the transfer is made by gift, the deferred gain may become taxable. However, inheritance by a surviving spouse is not a taxable transfer, nor is a transfer, upon death, of an ownership interest in a qualified opportunity fund to an estate or a revocable trust that becomes irrevocable upon death.

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